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Testing additive versus interactive effects in fixed-T panels

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  • Westerlund, Joakim

Abstract

This paper proposes a new test of the null hypothesis of additive fixed effects versus the alternative of general interactive effects. This is not the only test of its kind in the literature; however, it is the only test that is valid in panels where T is fixed. The asymptotic distribution of the new test statistic is derived and simulation results are provided to suggest that it performs well in small samples.

Suggested Citation

  • Westerlund, Joakim, 2019. "Testing additive versus interactive effects in fixed-T panels," Economics Letters, Elsevier, vol. 174(C), pages 5-8.
    • Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:5-8
    DOI: 10.1016/j.econlet.2018.10.016
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    References listed on IDEAS

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    3. Donald W. K. Andrews, 2005. "Cross-Section Regression with Common Shocks," Econometrica, Econometric Society, vol. 73(5), pages 1551-1585, September.
    4. Robertson, Donald & Sarafidis, Vasilis, 2015. "IV estimation of panels with factor residuals," Journal of Econometrics, Elsevier, vol. 185(2), pages 526-541.
    5. Anatolyev, Stanislav, 2012. "Inference in regression models with many regressors," Journal of Econometrics, Elsevier, vol. 170(2), pages 368-382.
    6. Ahn, Seung C. & Lee, Young H. & Schmidt, Peter, 2013. "Panel data models with multiple time-varying individual effects," Journal of Econometrics, Elsevier, vol. 174(1), pages 1-14.
    7. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    8. Chang, Yoosoon & Phillips, Peter C.B., 1995. "Time Series Regression with Mixtures of Integrated Processes," Econometric Theory, Cambridge University Press, vol. 11(5), pages 1033-1094, October.
    9. Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, July.
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    Citations

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    Cited by:

    1. Yana Petrova & Joakim Westerlund, 2020. "Fixed effects demeaning in the presence of interactive effects in treatment effects regressions and elsewhere," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(7), pages 960-964, November.
    2. Claudia Pigini & Alessandro Pionati & Francesco Valentini, 2023. "Specification testing with grouped fixed effects," Papers 2310.01950, arXiv.org.
    3. Li, Haiqi & Chen, Xingyi & Liang, Jufang, 2022. "Shrinkage estimation of panel data models with interactive effects," Economics Letters, Elsevier, vol. 210(C).

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    More about this item

    Keywords

    Panel data regression; Additive fixed effects; Interactive effects; Hausman test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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